Chemical Carriers: The Slump Will Continue

Drewry's latest report, "Chemical Carriers: Facing an Uncertain Future?" addresses the key market issues and examines the changes in fundamentals in the 1990's and their probable evolution into the middle of the next decade.

In the run-up to the Asian crisis, the chemical carrier sector was buoyed by strong trade growth in conjunction with the rapid expansion of new plant capacities. However, all was not well even at this juncture, with a peak in freight rates in 1995 having built up increasing numbers of newbuilding orders. With newbuilding prices under pressure and many product carriers specifying the carriage of simple chemical cargoes, things were always likely to get worse.

The massive dislocation in chemical trades that has been witnessed reflects the industry's attempts to sustain competitiveness and has in turn prompted restructuring among the main players. For owners of chemical carriers the problem of maintaining utilization rates has had to be balanced against an inevitable concession in rate levels. A considerable swathe of chemical capacity is still moving forward in spite of the upheaval in demand and general concerns that a cyclical recovery will not be initiated before 2001. Coupled with this is an exhaustive orderbook and fleet age profile that does not suggest any imminent upsurge in fleet renewal. In an environment such as this it is not so much a case of winners and losers but rather assessing the market's casualties, applying the relevant therapy and waiting to see who will survive and for how long. With demolition of the chemical tanker fleet becoming limited in recent years, the age profile of this fleet suggests that deliveries will be greater than tonnage scrapped in the near future, therefore expanding the fleet.

Whether or not the major operators can balance their schedules in some way still looks doubtful. As a result, rates and utilization are almost bound to remain low in the short term. Figure 1 shows a summary of the relationship between total chemicals trade and the consequent demand expressed in terms of deadweight including the aggregate supply assessment and overall market balance to 2005.

The new Drewry Chemical Quarterly- First Quarter 1999 Report highlights that fears regarding the capacity of the chemical carrier market absorbing the level of newbuilding deliveries in 1988 were indeed well founded. The substantial number of newbuildings resulted from shipowners' attempts to offer more high performance vessels adapted to international regulations — combined June, 1999 with the expectation that demand in the Asian markets would continue to grow. With the chemical carrier orderbook in excess of 20 percent in tonnage terms, rising to more than 30 percent in some fleet segments, the outlook remains very poor. In 1999 the fleet is likely to expand by another 10 percent annualized, while freight rates continue to remain under pressure.

In this environment it is perhaps surprising that a mere handful of vessels has been sold for demolition in the last 12 months. (Analysis shows that vessels sold for demolition in the 1990's are on average around 25 years of age). But this will not do much to counter the four million dwt of vessels (including product- chemical carriers) on order as not much more than one million-dwt is currently at this milestone.

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